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Proverbs 16:9 The heart of man plans his way, but the Lord establishes his steps
Today, we are going to break down a mortgage scenario and combine the 2 mortgage strategies I told you about to save nearly 43% of the mortgage interest on a hypothetical $400,000 house if we bought it today! Ready for me to show you how to save over $130,000 in interest? Here we go. First, let's bring in the loan terms for a typical $400,000 house.
As you can see we have 20% down to avoid PMI (Private Mortgage Insurance), a $320,000 loan amount on a 30-year loan at 5.3%.
If we would don't apply any strategy and do like most of us do, we pay based on the terms, we get the bill, we pay it and go on with our life.
In that case, we are looking at $319,710.96 paid in interest over the 30 years.
Nothing too fancy.
But one of the things that should jump out at you is that you are paying nearly the same amount in INTEREST as you are paying for the house. 😱
And that does not include the Property Tax and Home Insurance. But we are going to fix that.
But first, let me tell you why it takes you 30 years to pay off a 30-year loan that you can pay off in less time.
It is called Parkinson’slaw.
Parkinson's Law is the adage that “work expands so as to fill the time which is available for its completion”, which signifies that the more time people dedicate in advance to a certain task, the longer it will take to complete it, even if it could have been completed in less time.
What that means is if the bank tells you, you can pay off the loan in 30 years, you are going to take every day of that 30 years to pay it off. If you were given 25 years, you would do it in 25.
Just like in school. It didn't matter if the teacher gave you 2 weeks to complete a 4-hour project, it was inevitable that you would be up the night before trying to get it done before class started.
So how are we going to reduce this number and put some more money back into our pockets?
A few emails ago, I taught you about bi-weekly payments. Breaking your monthly payment into two separate payments and how that reduces interest paid WITHOUT paying an additional cent. (Please check with your mortgage company, sometimes they won't allow it because they know they will lose interest).
Well let's see what bi-weekly payments does to the interest in this scenario:
With this one strategy, a 30-minute phone call to your mortgage company can save you $61,639.20*.
IMPORTANT: Before we continue, I want to remind you that these calculations are based on the initial purchase date. The longer you wait to implement this, or similar strategies, the interest saved will be reduced.
Let's keep going.
So now, we have saved over $60,000 and reduced your years of payment by 5 YEARS, congratulations!!! 🎉🎊
Now, let's take it to the next level.
Remember our Word of the Day? Parkinson's Law
We don't want to wait the whole 30-years when we can potentially pay off our mortgage earlier than the terms outlined in the loan, right?
So what do you do?
You make additional "Principle Only" payments. Many make the mistake of just making a "payment" which goes to principle and interest. I can write another e-mail about how to pay a mortgage, but let's stay on topic here. Just know the extra payments you make should be go to "Principle ONLY".
You may be asking..."A.B., You are telling me to make additional payments, how is that saving me money, seems like I am spending MORE money?"
Great question!
"You are not paying more, you are technically paying less when you pay more."
Once again, I don't want to get into why that statement is true. But I'll address it on my podcast "Financial Advisors Say The Darndest Things" in an upcoming episode. It speaks to the fact that people don't think they are saving if they can't see the physical cash. But like I said, that is another conversation.
With that said, let me show you what it will look like if you just make 1 additional principle-only payment** a year towards your mortgage.
**in this example the mortgage payment without property tax and insurance is only $1776.97 but we are going to use their monthly payment amount of $2,301.97 because it is easier to find. If that number is too high for one payment, you can always divide it by 12 and spread it out over the year. Ex: ($2,301.97 ➗12)= $191.83 per additional principle payment per month.
As you can see, by just applying these two mortgage strategies, we just saved ~$138,744.47.
If you divide that savings by the cost of the house $320,000 then you just saved roughly 43% of your home price from interest charges that stay in your pocket and not the pockets of the banks.
As you can see, just the extra payment ALONE can save you roughly 6 years of mortgage payments.
This brings us to our scripture for the day that speaks about planning. We wonder why we don't have any money. It isn't because we aren't making enough, it is because we are slowly giving our money to people who have planned out their finances.
Do you think these banks and mortgage companies came up with these terms by accident? No.
Do you think they want you to pay off your mortgage earlier? No.
These banks and mortgage companies have planned out, to the dollar, what they will make, and unless you plan too, you will fall victim to their greed.
Think about it!
With an extra $138,000 you can buy a small rental property in CASH.
With everything else equal, which is a better deal for $639,710?
A) 1 house
or
B) 1 house AND 1 rental property which will create a separate stream of monthly income?
Exactly!
They didn't teach you this in school, did they?
As a final thought, don't fall victim to Parkinson's Law. If you have an established savings, an emergency fund, contributing to your 401k, and have some extra cash, before you run to Bitcoin, or the hottest stock, think about saving some money where it counts.
People ask me all the time what does a financial planner do? Well, this is just one example of what we do.
Financial planning is planning around your whole financial life not just your investments.
*Disclosure* This is for illustrative purposes only. If you are thinking about making any financial decisions concerning your mortgage, make sure you contact a professional.
If you need help with your mortgage analysis or just need to talk about your financial plans schedule a free consultation and we can discuss a plan of action for you.
Thank you for reading!
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About the blog:
Many Christians struggle with the seemingly conflicting views about our faith and the pursuit of financial gain. They were taught that poverty was piety and that a lack of money was the only way to truly detach themselves from the love of money. Our blog debunks some of those claims, teaches you that you can be rich and righteous, and at the same time fulfill your obligation to tithe and give to the less fortunate. We are dedicated to helping you become cheerful givers by organizing your personal finances, providing investment tips to help you create wealth, and encouraging you to create a gifting strategy that will make your family and God proud.
Meet the Author:
A.B. Ridgeway, MBA (info@abrwealthmanagement.com) is the owner and Christian Financial Advisor with A.B. Ridgeway Wealth Management. With a decade in the finance industry, his goal is to give believers clarity around the most confusing topic in the Bible, money, and tithing. A.B. Ridgeway helps tithing Christians become cheerful givers but unlocking their money-making potential, so they can prosper and be the great stewards of the wealth God has entrusted them with.
This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy or the completeness of any description of securities, markets or developments mentioned. This is strictly for information purposes. We recommend you speak with a professional financial advisor.